Cyprus agrees to bailout deal but at what cost to Eurozone

Cyprus agrees to bailout deal

Cyprus has averted a collapse in its banking system and a swift exit from the Eurozone after agreeing to the €10bn bailout deal set out by finance ministers.

The deal will see Laiki Bank, the country’s second biggest bank, wound down, split into “good” and “bad” banks and have its good assets merged into the Bank of Cyprus, the nation’s leading bank.

While Cyprus has steered around immediate disaster, the knock-on effects of bailout deal will come as a blow to Cypriot savers.

Losses from the closure will be absorbed by individuals with deposits in Laiki Bank that stand at more than €100,000 (£85,000).

Cyprus government spokesman Christos Stylianides told state radio the percentage to be levied on large deposits could be set at “around 30%.”

Under the deal, which was reached after hours of tense negotiations between Cypriot President Nicos Anastasiades and the "troika" of EU, European Central Bank and IMF leaders, all deposits of less than €100,000 will be secured.

IMF head Christine Lagarde said the bailout deal agreed was "a comprehensive and credible plan" to help restore trust in the banking system, while Cypriot Finance Minister Michalis Sarris said he believed the possibility of bankruptcy had been averted.

"It's not that we won a battle, but we really have avoided a disastrous exit from the eurozone," he said.

What are the critics saying?

However, not everyone was happy with the outcome. The chairman of the Cypriot parliament's finance committee, Nicholas Papadopolous, said the agreement made "no economic sense".

Speaking to the BBC, he said: "We are heading for a deep recession, high unemployment. They wanted to send a message that the Cypriot economy ought to be destroyed, and they've succeeded in a large part - they've destroyed our banking sector."

Eurozone

With the country facing a deep recession and the imminent closure of many businesses, external markets could feel the full force of the nation’s economic woes. Furthermore, according to experts, the incident also highlights the volatility of the Eurozone as a whole.

Marshall Gittler, Head of Global FX Strategy at IronFX, said: “The whole affair has highlighted the difficulties of making decisions in the Eurozone and the impediments to a true single market, for example in banking supervision.

"As usual, the decision came around midnight on a Sunday (0:40 AM Brussels time), a familiar pattern now. Is that anyway to run an economy?"